Healthcare is provided by medical professionals, often for humanitarian goals. Yet, healthcare is simultaneously an industry grappling with the same concerns of any business, including protection of valuable intellectual property as physicians enter and leave practices in advance of their own careers. 2This article addresses the issue of whether “patient lists” can be protected as “trade secrets,” and, if so, who owns them. The issue arises most often when a departing physician leaves a practice and takes with her or him the patient list, most commonly for competition purposes. Although jurisdictions differ in their answers, there is both precedent and a sound analytical framework for protecting patient lists as trade secrets of the medical group or employer. 3

I.Federal and State Courts Have Held That Patient Lists are Trade Secrets

The National Conference of Commissioners on Uniform State Laws adopted the Uniform Trade Secrets Act (“UTSA”), 14 U.L.A. 541 (1980), at a conference in 1979 as a model for a uniform body of state trade secret law. The UTSA defines “trade secret” as:

information, including a formula, pattern, compilation, program device, method, technique, or process, that: (i) derives independent economic value, actual or potential, from no being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

The UTSA also defines key terms such as misappropriation and provides for remedies. Since its adoption, forty-three states and the District of Columbia have adopted statutes modeled on the UTSA. 4

Patient lists are natural candidates for protection as trade secrets: they consist of patient data that are not readily ascertainable to the outside world; 5they derive economic value to the medical practices by containing valuable contact information; and all practices take great care to protect them. In almost all cases, such lists may be accessible only to a select number of employees and also password protected for computer access.

One of the earliest decisions on this issue, Dickinson Medical Group, P.A. v. Foote, 9 Del. J. Corp. L. 180 (1984) (unpublished), grappled with the tension between protecting the patient list as a trade secret and protecting patient choice. There, recognizing that patient lists constitute trade secrets under Delaware’s trade secrets act, the court granted a restraining order against an oncologist formerly employed by the plaintiff- medical group. Id at 184. Yet, the court expressed sympathy towards sick patients, including those undergoing chemotherapy, who might be deprived of ongoing care from the defendant. Id at 183. The court found the potential consequences of its decision “to be disturbing,” however. Id. It consequently ordered the plaintiff to notify its patients of defendant’s move to a new practice within five business days. Id at 184-5. 8

Three years later, the New York Supreme Court also found patient lists to be trade secrets. Thus, in Damf v. Bloom, 127 A.D. 2d 719 (NY 1987), the court affirmed an injunction prohibiting use of a computerized list of patients by a dentist formerly employed by plaintiff. The concisely worded opinion refers to misappropriation, an abuse of trust, and “improper use of [the patient list] to solicit plaintiff’s patients.” Id at 720. Additional factors included efforts to keep the list secret and the fact of information about each patient being “secured by years of efforts and advertising by the plaintiff.” Id.

The plaintiff-debtor in In re American Preferred Prescription v. Health Management Inc., 186 B.R. 350 (E.D.N.Y. 1995), sought to prevent a former employee from divulging a patient list that included names of its HIV-positive clients.. The court denied injunctive relief because the former employee acknowledged that she could not (and promised that she would not) divulge proprietary information. 186 B.R. at 358. Yet, the court held that the list “qualified as a trade secret” because of “the great deal of time and money” that had gone into creating it, the confidential status of the patient base and the fact that the list was a sort of “specialized compilation” that constituted “a competitive advantage” to APP. Id at 356-57.

More recently, in US Bioservices Corp. v. Lugo, 595 F. Supp. 2d 1189 (D. Kan. 2009), a federal district court held that patient lists are trade secrets under the Kansas Trade Secrets Act (“KTSA”). Acknowledging that “customer lists” are typically entitled to trade secret protection, defendants asserted that plaintiff could not seek to protect a patient list without proving that it met the requirements of a customer list. 595 F. Supp. 2d at 1195. The Court rejected that assertion because “the act’s protection is not limited to customer lists, as defendants appear to suggest.” Id. (emphasis in text). Since patient lists “would be valuable to competitors” and plaintiffs had alleged sufficiently “reasonable efforts to maintain the secrecy of that information” they were deemed protectible under the KTSA. Id.

As a practical matter, medical groups should identify and address this issue at the very outset of a relationship with a physician. Specifically, their contracts should clearly state that patient lists are proprietary trade secrets and confirm that injunctive relief and monetary damages can be obtained in the event of their misappropriation. Of course, such provisions cannot restrict physicians from discussing treatment options with their patients if those discussions are for purposes other than the physicians’ financial gain. The tension between protecting patient lists as valuable intellectual property, on one hand, and the need for departing physicians to communicate with patients about medical care, on the other hand, is a tension that will continue to exist in this area for the foreseeable future.

Conclusion

There is sound precedent for protecting patient lists as trade secrets. Consequently, in those states that have adopted the UTSA, the owner of the patient list may be able to obtain an injunction against a person who has misappropriated that list, as well as damages and/or disgorgement of profits. Also, in those cases where the misappropriation is willful and malicious, the owner may be able to obtain exemplary damages and attorneys’ fees. See, e.g,In re Phoenix Dental Systems, Inc., 144 B.R. 22, 25-26 (W.D. Pa. 1992) (issuing injunction); Damf, 127 A.D. 2d 719, 720 (NY 1987) (affirming judgment and injunction); see alsoReadylink Healthcare, 126 Cal. App. 4 th 1006, 1017-26 (2005) (affirming injunction with modifications). Since the law necessarily varies state-by-state, the best practice in advising healthcare clients is to thoroughly review the law in your jurisdiction with an eye towards the nuances of these issues.

Hernandez Schaedel & Olson, LLP (“HSO”) is a Southern California law firm based in Pasadena. Further information about the topic, the article’s authors and their law firm can be found at www.hernlaw.com

Managed care is increasingly widespread in the United States, and its structure necessarily involves layers of contractual relationships among hospitals, health plans, physician groups and individual physicians each of whom has some connection to a patient. Further, many physicians are independent contractors not employees. While this difference is analyzed more frequently in deselection (or involuntary physician termination) cases, it was not a factor in the cases cited herein. For a good discussion of the potential significance of the employee/independent contractor distinction, see Liang, Deselection under Harper v. Healthsource: A Blow for Maintaining Patient-Physician Relationships in the Era of Managed Care?, 72 Notre Dame L. Rev. 799, 845-51 (1997).

The cases cited herein make no distinction for departing physicians who were formerly employees and those who were partners or shareholders in a professional corporation. In all cases, the courts have held, the patient list belongs to the practice and not the individual physician.

A list of states that have adopted the UTSA, including with statutory citations, and a link to full its text can be found at: http://www.ndasforfree.com/UTSA.html Only Massachusetts, New Jersey, New York, Pennsylvania, Tennessee, Texas, and Wyoming have adopted their own statute or instead rely on common law.

Thus, in the decision of In re Phoenix Dental Systems, Inc. v. Phoenix Dental Systems, Inc., 144 B.R. 22 (W.D. Pa. 1992), a dentist, formerly employed by debtor, a dental clinic, filed a petition for declaratory relief and an order granting him the right to contact former patients of the clinic. Not only was his petition unsuccessful, the court issued an injunction against the petitioner prohibiting him from contacting former patients for a period of two years. 144 B.R. at 26. In so doing, the court held that under Pennsylvania law “the names of Debtor’s patients are a trade secret” because they “are not ascertainable from an outside source” and were the dental clinics “most valuable asset.” Id at 25.

Practitioners in this area have understandably called the outcome in Dickinson “a Pyrrhic victory.” See Silberberg and Lardiere, Eroding Protection of Customer Lists and Customer Information Under the Uniform Trade Secrets Act, 42 Bus. Law. 487, 496-97 (1987).